Parental Spending on Higher Education: Incorporating Guilt Aversion in Intergenerational Transfers

What is it about?

We model a situation wherein a parent decides to spend part of her savings for old age on her child’s higher education, and the child decides how much to spend on supporting his old parent. The child’s wealth is a function of the parent’s spending on his higher education. Both the parent and the child experience disutility due to guilt if they disappoint the other by not meeting their expectations. In the subgame perfect equilibrium, both the parent and the child meet each other’s expectations if they are sufficiently guilt-averse. If there exist high positive returns to education and the parent knows that her child is guilt-averse, she spends her entire savings on the child’s higher education, and the child transfers an amount that is more than his parent’s expectation. Underinvestment in education is also possible under some parameter conditions.

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Why is it important?

Several Indian parents are willing to fund their children’s higher education abroad despite the costs being up to 64% of their retirement savings (Singh 2024). Indian households spend close to half of their annual income on professional higher education for each child (Choudhury and Kumar 2022). In China, low-income households spend 56.8% of their income on children’s higher education (Hu et al. 2023). Our model explains this behavior.